When is fiscal policy needed?

Over at Econlog I have a new post pointing out that central banks have never actually explored whether the zero rate bound limits monetary policy.  They don’t seem curious. I pointed out that, at a minimum, they’d first have to lower interest on reserves (IOR) so far that excess reserves fell close to zero.

Here I’d like to look at things from a different perspective—when is fiscal policy appropriate?

The place to begin is with the powers of the central bank—let’s use the Fed as an example.  What are their powers?  Who sets them?  Are they vague, or clearly spelled out?

Policy will be more effective if each branch of government clearly understands its role. Unfortunately, we don’t live in that world.  But even so, the Fed can certainly try to spell out its policy options, even if the set of options is rather complex.

As you know, I’d prefer a policy regime where fiscal stimulus was never needed, and instead the Fed bought up whatever was necessary to hit its target, even if it ended up owning the entire world.  Of course we don’t live in that world, so when should fiscal policy click in?

Like everything in economics, it’s all about costs and benefits.  Recall that in 2012 Fed chairman Ben Bernanke talked vaguely about various “costs and risks” of using unconventional monetary policy.  In his memoir, he gives the impression that this was more a concern of the committee, rather than him personally.  But nonetheless the perception of costs and risks is real, and influences policy.  So let’s assume these two costs:

The marginal cost of adding $1 to the Fed balance sheet is an increasing function of the size of the balance sheet.

The cost of a cut in the IOR is negatively related to the level of IOR.  The lower the interest rate, the higher the cost of an additional one basis point cut.

Fiscal policy also has costs and benefits, which increase with the size of the deficit.  In my view, the lowest cost fiscal stimulus, per job created, is a payroll tax cut.  This ignores possible supply-side effects of cuts in capital taxation, which is of course a highly contentious issue.  Or external benefits from more infrastructure, which is also controversial.

In other words, it’s always possible to point to fiscal changes that are desirable even if no fiscal stimulus were needed. (“Now more than ever, blah blah blah . . .) Conservatives want lower MTRs and liberals want more infrastructure or social programs.  But that’s sort of cheating, as those would presumably be done even if there were no need for fiscal stimulus.  And if they are not done, then policymakers clearly don’t agree that they are desirable.  Here I’m trying to approach the subject from a non-political angle, how to generate more AD.  (And yes I know, it’s hopeless—just trying to do thought experiments)

A cut in the payroll tax on employment seems like it would give the most bang for the buck, in terms of job creation.  An increase in the Earned Income Tax Credit is another possible policy aimed directly at more employment.

So let me summarize what I’ve got so far:

In an ideal world, the central bank does whatever it takes; no fiscal stimulus is called for.  The costs of more monetary stimulus are near zero, and certainly lower than the costs of fiscal stimulus.

In the second best world, Congress and Fed clearly describe the powers of the Fed, and the costs of things like a big balance sheet and/or lower IOR.  

In the third best world it’s all a big muddle.  Congress doesn’t even know what the Fed’s powers are, and indeed barely even understands what the term ‘monetary policy’ actually means.  (They probably think it means control of interest rates, not NGDP.) 

In that sort of world the Fed must decide what it thinks it is entitled to do, and the costs of more aggressive monetary stimulus (bigger balance sheet, more strongly negative IOR.)  Then it must weigh those costs against both the cost of high unemployment and also the cost of alternative fiscal stimulus, as well as the probability that this alternative fiscal stimulus will actually occur.

Here’s an example of the third best world (which is obviously the world we live in.)  In late 2012, the Fed saw that Congress was about to sharply reduce the budget deficit (which fell by $500 billion in calendar 2013).  Up until that point in time, the Fed had not done as much monetary stimulus as would normally be appropriate, because (according to Ben Bernanke) the FOMC was worried about the “costs and risks” of a larger balance sheet.  They had done QE up to the point where the perceived marginal cost of an additional dollar of QE was equal to the perceived benefit in terms of lower unemployment.  (I think they misjudged this, but let’s set that aside.)

Now with Congress about to do austerity, the perceived costs and risks changed.  Now the 2012 Fed policy stance would be associated with more unemployment than previously expected.  Still applying cost/benefit analysis, the Fed decided that more QE (and forward guidance) would be appropriate, as the risk in terms of lost employment of not acting was greater than in 2012, due to the fiscal austerity.  So they did act, and indeed overreacted if you buy my model.  That’s because growth actually accelerated, whereas my model predicts a tradeoff, with growth slowing, but not as much as it would have slowed with no action.

This post is rather messy because the real world is messy, so let’s conclude by trying to add some structure:

First, we need to think about what the Fed can and cannot do.  In my view we need clear instructions for the Fed, but I accept that this won’t happen.

Second, if we lack instructions, the Fed must decide on its own what it can and cannot do, and how much it is able to do things like QE and negative IOR.  In my view, it currently has enough power so that fiscal stimulus is not appropriate, if the powers are used wisely.

Third, the Fed doesn’t agree with me that it has enough power so that fiscal stimulus is never appropriate.  However the Fed has never clearly spelled out why it disagrees with my view.  For instance, Bernanke favored Bush’s spring 2008 fiscal stimulus, even though we were not at the zero bound.  But he doesn’t explain why.  What were the “costs and risks” of additional rate cuts, instead of fiscal stimulus?  Or was this about a split within the Fed, where Bernanke couldn’t get enough support for more stimulus, and hence he wanted Congress to do the Fed’s job?  Unfortunately, he doesn’t tell us, which is the weakest aspect of his recent memoir.

And finally, I understand that my view of the risks and costs of monetary stimulus is less important than the Fed’s view.  I do see that if the Fed views unconventional policies (and maybe even conventional?) as involving costs and risks, then they will sometimes fail to take adequate steps to maintain appropriate NGDP growth.  But it’s not really clear what this means.  It would be really easy if the Fed just sort of hit a wall, a legal limit on what they could buy, and then suddenly “ran out of ammo.”  In that sort of case the solution would be clear, let fiscal policy take over at that point, but not when the Fed can still cut rates.  But as we saw in late 2012, we don’t live in that world either; the Fed will do more costly and risky stuff when they see the need as being greater.

So in the end the problem is too complicated for any sort of “scientific” solution.  And thus we should not be surprised that people end up all over the map.  Monetarists like me want more monetary stimulus. Keynesians like Christy Romer want the same, but also employer-side payroll tax cuts.  Paul Krugman worries that employer-side tax cuts would be deflationary, and favors more spending on infrastructure or social programs.  Supply-siders favor cuts in MTRs to boost growth from a supply-side perspective.  The policy “game” being played here is far too complex for even our most advanced game theory models, and hence people will fall back on the solutions that they find the most appealing.

For me, I’m skeptical that Congress can ever do the “NGDP targeting” job adequately. In contrast, I saw signs in 1984 through 2007 that the Fed was reasonably good at the NGDP targeting, and I want to push hard for some additional modifications to overcome the zero bound problem, rather than throw up my hands and hope that Congress solves the problem next time.  I see the Fed’s ability to learn from past mistakes as being far superior to Congress’s ability, at least in the realm of macroeconomic stabilization.  So that’s why I focus like a laser on monetary reforms. It’s not that I don’t understand why others might find fiscal stimulus appealing—in a game this complex I can see how it might be an option.  I just don’t think it’s the best option.

We are about to exit zero rates. Now more than ever we need to fix monetary policy—before the next recession.  If we go into the next recession with the current monetary policy regime then the entire community of macroeconomics will have failed, and failed shamefully, to address the clear need for better options at the zero bound.  The Fed needs to act NOW.  I’m glad to see that the Bank of Canada understands the need for reform, and I hope the Fed also reaches this conclusion.

Most like we won’t solve the problem, and in the next recession a GOP government would do tax cuts and a Democratic government would boost spending.  That’s reality. But I do predict that we will make some progress, and not be as woefully unprepared as in 2008.



48 Responses to “When is fiscal policy needed?”

  1. Gravatar of Gordon Gordon
    22. November 2015 at 13:53

    “We are about the exit zero rates.” Scott, I’m curious about something. It seems like the Fed is fixated on interest rates as its preferred policy tool. The FOMC knows it cannot easily reduce the supply of base money to get an increase in the effective fed funds rate so it’s going to increase the IOR. But wouldn’t reducing the supply of base money still be a tightening of policy even if it had no effect on the fed funds rate? And why did changing reserve requirements fall out of favor as a policy tool? Is it really any different than increasing IOR? It seems like they both achieve the same result of reducing base velocity.

  2. Gravatar of Christian List Christian List
    22. November 2015 at 15:05

    “When is fiscal policy needed?”

    Is this really the *right* question? I mean the state is collecting and spending taxes all the time. Shouldn’t the question be: How much taxes should be collect and on what should it be spent?

    I’m also embarrassed to admit that I never really get the fundamental difference between fiscal and monetary policy. It always seems so logical in the beginning but the longer I think about the blurrier it gets.

    I think a lot of people get following impression: If you create money and hand it directly to the little guy, it’s called fiscal polity. If you create money and keep it in your “vault” and/or hand it out to the banks, it’s called monetary policy. What am I missing?

  3. Gravatar of Christian List Christian List
    22. November 2015 at 15:07

    *spent on.

  4. Gravatar of Benjamin Cole Benjamin Cole
    22. November 2015 at 15:49

    Excellent blogging.

    I am still trying to figure out the “costs” of the Fed’s balance sheet. Taxpayers save some money.

    A better question: What are the costs of not enlarging the Fed’s balance sheet continuously?

  5. Gravatar of Major.Freedom Major.Freedom
    22. November 2015 at 17:24

    “When is fiscal policy needed?”


    Now onto more important issues and ideas.

  6. Gravatar of Michael Byrnes Michael Byrnes
    22. November 2015 at 18:19

    Putting monetary offset aside for the moment, I have always thought that it was hard enough to keep the government focused on getting an adequate return on its money without throwing fiscal stimulus into the equation.

    With fiscal stimulus, the spending sort of becomes its own return. (“We wanted to put $500 billion out into the economy, and we did! Mission accomplished!”)

  7. Gravatar of Ray Lopez Ray Lopez
    22. November 2015 at 18:53

    From the internet, reputable sites. However I agree with Sumner’s proposal to abolish this practice with banks, as they have been subsidized long enough (7 yrs) by the Fed. -RL

    Four decades ago, Milton Friedman recommended that central banks like the Federal Reserve pay interest to depository institutions on the reserves they are required to hold against their deposit liabilities. This proposal was intended to improve monetary policy by making it easier to hit short-term interest rate targets. However, the Fed didn’t have the authority to pay this kind of interest until 2008.

    Paying interest on required reserve balances should essentially eliminate the opportunity cost of holding required reserves, promoting efficiency in the banking sector. This will also enable the Fed to raise reserve requirements if inflation becomes a problem without doing too much damage to the bottom line of already-fragile banks.

    Paying interest on excess balances should help to establish a lower bound on the federal funds rate

  8. Gravatar of ssumner ssumner
    22. November 2015 at 19:10

    Gordon, Reserve requirements are a blunt instrument, and generally are not the preferred tool. But I agree that reversing QE makes more sense than higher IOR.

    Christian, I don’t know that there is is a sharp difference, but in my view monetary stimulus does not create a need for higher future taxes, whereas fiscal stimulus does. Thus if you buy a bond, you can recoup the money later by selling the bond. If you buy a new bridge with borrowed money, you generally can’t recoup the money by later selling the bridge to pay off the loan.

    The other difference of course is that monetary stimulus generally increases the supply of base money, whereas fiscal stimulus does not.

  9. Gravatar of Ray Lopez Ray Lopez
    22. November 2015 at 19:17

    Banks start lending about the time the Fed ‘tapered’ purchases, proving the interest on excess reserves were a profitable activity for banks. – RL


    Outstanding loans at U.S. banks have increased over $800 billion in the past 12 months, and have been increasing at about a 7.5% annualized rate over the past year and two years. One area of bank lending—Commercial & Industrial Loans—has been expanding at 10.5% annualized pace for the past 5 years, and has expanded by over $200 billion in the past year, up 11.6%. Banks still have over $2.5 trillion of excess reserves (reserves in excess of what is required to collateralize their deposits), so bank lending could theoretically continue to expand at heady rates almost indefinitely.

    As the chart above shows, the pickup in bank lending got started about two years ago, after being very weak from 2008 through 2013. It may just be a coincidence, but bank lending started picking up right around the time—in early January 2014—the Fed announced that it would “taper” its purchases of notes and bonds, which turned out to be a prelude to the end of the third round of Quantitative Easing. Prior to that time, banks had apparently been eager to accumulate excess reserves, and relatively unwilling to lend to the private sector. In effect, by accumulating excess reserves, banks were lending principally to the Fed. In the past two years this has shifted, with banks lending much less to the Fed and much more to the private sector.

  10. Gravatar of Postkey Postkey
    23. November 2015 at 02:05

    “Here is a graph of the difference between cumulative tax revenue and cumulative federal spending in the US since 1789. The US started to run fiscal deficits systematically in 1931 and since then has run deficits 85 per cent of the time. Every time they had tried to run surpluses a recession has followed.
    Note the gap widens after the early 1970s, which of course is when the Bretton Woods system of convertible currencies and fixed exchange rates was abandoned and the US government adopted a fiat currency system.
    It seems that public spending is not paid for by taxes over a long period of time. . . . ”

  11. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    23. November 2015 at 05:50

    I really think a discretionary central bank, deciding its own goals, is not the best solution. Groupthink and conflicting biases lead to (near) paralysis. Clearly defined, robust rules (i.e. not very complicated), maybe are not the very optimum solution, but they prevent the monetary authority makeing the very worst mistake…

  12. Gravatar of Ray Lopez Ray Lopez
    23. November 2015 at 06:34

    OT – Tyler Cowen–who invented Scott Sumner as an internet guru (it’s true, though Sumner will deny it)–recommends Sumner’s book as one of the best non-fiction books of 2015: “Scott Sumner, The Midas Paradox. Boo to the gold standard during the Great Depression. ” – but it’s not Sumner’s 2005 book that just came out!? Why has Sumner been silent on this book? Is he ashamed of it?

  13. Gravatar of TallDave TallDave
    23. November 2015 at 06:37

    Never. Government spending should always be limited to an absolute minimum of true public goods. Around 70-90% of what OECD governments spend is either wasted or could be provided by private sector actors, GDP could probably be around 50% higher by now if rule had been followed since the early 1900s. Societies would have less “income equality” but greater utility (or consumption adjusted for utility) equality; the illusions of Marxism are the great enemy of rising living standards for all.

  14. Gravatar of Christian List Christian List
    23. November 2015 at 08:07

    Thank you so much for your explanations. This really helps me a lot. I think monetary policy got a bit of an image problem with the average Joe compared to fiscal policy. Politicians also seem to prefer fiscal policy because then they can do *something*.

    @Ray Lopez
    “Why has Sumner been silent on this book?”

    He talked about his book multiple times. Just a few posts ago. There is just this one book, what are you talking about? I bet you even commented on it. Of course you did.

  15. Gravatar of Benny Lava Benny Lava
    23. November 2015 at 09:47

    Speaking of this, did yo see Germany trying to sink the EU again?


    Not sure what you think about this but it seems that tight EU central bank policies sank Ireland, Italy, Spain, and Greece and have knocked France flat. At this point qui bono besides Germany? Am I missing something here?

  16. Gravatar of Christian List Christian List
    23. November 2015 at 11:17

    @Benny Lava
    You’re missing that German officials are batshit crazy. They don’t know what they are doing. Starting with Angela Merkel.

    Is my hypothesis wrong? I don’t think so. Among competing hypotheses, the one with the fewest assumptions should be selected.

  17. Gravatar of Jerry (not the governor) Brown Jerry (not the governor) Brown
    23. November 2015 at 12:19

    I think this is a really good post. Very fair and balanced.

    Like Benjamin Cole, I wonder what the costs of good monetary policy (even if it includes a huge balance sheet) really are. It seems pretty clear that the costs of bad monetary policy can be Great Depressions on the one extreme, and hyper-inflations on the other. But what are the costs of a large Fed balance sheet in a non-inflationary environment?

    As to fiscal policy- I prefer to think that the cost of good fiscal policy is the real resources that government spending diverts from their previous uses. If their previous use was sitting around not doing much of anything, then the cost is low, even a possibly negative cost if they can be put to productive uses. Especially if the idle resources are people who really do want to be doing productive things and thereby gain an income. So that is when fiscal stimulus policies would be appropriate. The costs of bad fiscal policy include that diversion of resources, but also include risks of demand side inflation (and increased taxes and or contractional monetary policy to deal with the inflation).

    And as to your first question about who sets the powers of the Fed- isn’t it pretty clear that the Fed ultimately derives its powers from Congress? Congress told the Fed they had to consider both price stability and full employment in their operations. Maybe that’s not specific enough, but it seems way better than the more specific goal and allowed methods of the ECB.

  18. Gravatar of Kevin Erdmann Kevin Erdmann
    23. November 2015 at 13:34

    “We are about to exit zero rates.”

    June 2018 Eurodollar contracts hit 4% in 2013 before QE3 began to taper. They have been on a steady downward trajectory since then, ranging between 1.5%-2% since September. I’m afraid we are about to exit zero rates in the same way that kangaroos are about to fly.


    (Set to weekly resolution, medium density, to get timeframe I’m talking about)

    PS. Somewhat related, I took a look at automatic fiscal stabilizers after seeing Timothy Taylor’s post today, and found them lacking.


  19. Gravatar of Gordon Gordon
    23. November 2015 at 13:40

    Scott, I have a question that is somewhat off topic from the main point of this post. In several of your posts of late, you seem to be comfortable with the idea of the Fed starting to tighten monetary policy. And I know you’ve agreed with Lars Christensen that the long run path for NGDP growth in the US is now 4%. But NGDP growth this year has been falling below 4%. So I’ve been having trouble reconciling NGDPLT and your acceptance of the possible tightening of monetary policy next month. Have I misunderstood your acceptance of this tightening? Or is it that you think that NGDP growth next year will be better even with a tightening of policy?

  20. Gravatar of Postkey Postkey
    23. November 2015 at 13:41

    “When is fiscal policy needed?”

    “Because of the fiscal stimulus, real GDP is about $460 billion (more than 6 percent) higher by 2010, when the impacts are at their maximum; there are 2.7 million more jobs; and the unemployment rate is almost 1.5 percentage points lower. “

  21. Gravatar of Doug M Doug M
    23. November 2015 at 14:54

    the problems with fiscal stimulus.

    It is slow to be installed. Congress doesn’t act until the economy is already in recession. They argue for a while, and eventually agree to a stimulus package. Congress allocates money to the executive.

    Various departments get bigger budgets. Department heads argue over their priorities. How long before the money allocated is spent?

    Or, the executive pushes the stimulus down to the states. Still has the same problems. Not so many “shovel ready projects are actually shovel ready.” By the time the stimulus hits it is 2 years late.

    And then congress is horrible about removing the stimulus in the recovery. Instead we hear about the fiscal cliff. The only reason the cliff exists is that the stimulus from the year before has not been extended for another year. There is always a constituency that will fight the removal of stimulus.

    But the big reason, is that the Fed has a much bigger lever.

  22. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. November 2015 at 15:11

    As Van Heusen and Burke put it, Life Is So Peculiar;


    Federal Reserve Chairwoman Janet Yellen wrote to consumer advocate Ralph Nader on Monday that low returns on savings are “fundamentally” caused by “the continuing aftermath of the financial crisis and the severe recession that followed it” rather than Fed monetary policy.

    In response to a letter from Mr. Nader, Ms. Yellen defended the Fed’s policy of holding rates at near-zero levels since 2008, saying that helped spur the economy. In particular, she wrote, lower rates propped up house and stock prices and prompted consumers and businesses to invest and create jobs.

    Higher rates, she wrote, would have had dire consequences.

    “Unemployment would have risen to even higher levels, home prices would have collapsed further, even more businesses and individuals would have faced bankruptcy and foreclosure, and the stock market would not have recovered,” she wrote. “True, savers could have seen higher returns on their federally-insured deposits, but these returns would hardly have offset more dramatic declines they would have experienced in the value of their homes and retirement accounts.”

    Higher rates could even have cost these savers their jobs and pension plans or forced them to support unemployed children and grandchildren, she added.

  23. Gravatar of TravisV TravisV
    23. November 2015 at 15:31

    Yglesias: “Hillary Clinton’s pledge to avoid middle-class tax hikes is bad news for progressive politics”


  24. Gravatar of TravisV TravisV
    23. November 2015 at 15:32

    Why aren’t market monetarists talking more about this?


    “Yellen, White House Step Up Opposition to Fed Oversight Bill”

  25. Gravatar of TravisV TravisV
    23. November 2015 at 15:34

    Fed’s Tarullo: It’s hard to overlook the fact that market-based and survey-based measures of inflation are near historic lows


  26. Gravatar of TallDave TallDave
    23. November 2015 at 16:44

    Kevin — Exactly. I have also seen people saying that interest rates are going to rise as the Boomers stop saving. Ha.

    Everywhere and always a monetary phenomenon.

  27. Gravatar of ssumner ssumner
    23. November 2015 at 17:36

    Postkey, You said;

    “Every time they had tried to run surpluses a recession has followed.”

    That’s one of those sentences that sounds important, but on closer inspection is somewhat vacuous. It’s like saying “every time we’ve had long economic expansions, a recession has followed.” You generally need a strong economy to get a surplus, under the US post war fiscal regime. After those strong expansions, you get recessions.

    Ray, You said:

    “though Sumner will deny it”

    “You just can’t get any more clueless. I’ve never denied that Tyler put me on the map. I can’t understand how someone can get everything wrong. You remind me of a student who got 11 out of 12 multiple choice wrong, when guessing should yield 3 right answers. Come on, this is all a spoof, right?

    Talldave, I agree, although I think GDP would be 10% higher, not 50%.

    Benny, Someone should tell the Germans that structural problems cause high inflation, not low inflation.

    Jerry, Yes, but when Congress provided that mandate, they weren’t serious. So the Fed has a lot of flexibility.

    Kevin, I agree that the rate rise will be a dead cat bounce. I haven’t had time to think about the tax issue you raise, but what if current losses are expected to be deductible at some point in the future, does that expectation change your analysis?

    Gordon, I see the long run growth rate as closer to 3%. I don’t see a big need to tighten, but I’m “comfortable” with it in the sense that I doubt a quarter point increase will do much right now. It’s what comes later that really matters. Suppose it becomes clear the Fed will fall short of 2% inflation, and then they tighten again in 2016, by another 1/4%. Then I’d be more critical.

    Doug, As you say there are huge practical problems. The least bad fiscal stimulus is probably an employer-side payroll tax cut, when a central bank is targeting inflation. That might reduce unemployment.

    Patrick, Nader should really stay away from monetary policy.

    Travis, I have a piece coming out in American Banker on that bill.

  28. Gravatar of Ray Lopez Ray Lopez
    23. November 2015 at 17:53

    Greg Ip at WSJ blog of 23 Nov writes this, which rebuts what TallDave says above. As more boomers retire, it will put upward pressure on interest rates. Central banks have nothing to do with interest rates; it’s structural factors like demographics now and to come. Money is neutral.


    The proportion of the developed world’s population in its highest-saving years—the decades just before retirement—has been rising in recent decades as populations have aged and fertility rates decline. That phenomenon is even more pronounced in China.
    This bulge in saving has helped push down interest rates around the world, according to Michael Gavin of Barclays.
    But, he warns, this about to change. When people retire, their income drops much more sharply than their consumption. As a result, they stop saving and start drawing down the assets they’ve acquired during their high-saving years. That could start to put upward pressure on interest rates and downward pressure on stock prices.

  29. Gravatar of Kevin Erdmann Kevin Erdmann
    23. November 2015 at 17:59

    Scott, a lot of cyclical problems would go away if they could be solved by future expectations. That might help at some margin, but the problem with contractions is that nobody has cash flow, and, if anything, expectations are wounded. Corporate tax policy contains a discontinuity that makes cash flow worse at the worst possible time, aimed at the most vulnerable firms. I hadn’t realized until I saw those charts at Conversable Economist that most of what we call automatic stabilizers actually appears to be a reflection of this pro-cyclical tax policy, and that if you really look at the timing of the stabilizers, considering that the first derivative of corporate profits are a good signal for the beginning and the bottom of economic contractions, the stabilizers are pro-cyclical. And this appears to account for a large proportion of what we call stabilizers.

    The main stocks I am following right now are stocks that are still valued low because most of their value is in tax assets that have been written off the balance sheet. So, there is some residual effect from the crisis, even now.

    I would count this as one more reason to favor the elimination of corporate taxes.

  30. Gravatar of ssumner ssumner
    23. November 2015 at 18:21

    Kevin, That’s interesting, it’s an issue I hadn’t given much thought to.

  31. Gravatar of Kevin Erdmann Kevin Erdmann
    23. November 2015 at 19:18

    I hadn’t either until I saw Taylor’s post this morning. It was surprising to me how sharply just a couple of Fred graphs told the story.

  32. Gravatar of Ray Lopez Ray Lopez
    24. November 2015 at 06:24

    So what stocks are you recommending Kevin? (Ray rolls eyes).

    Sumner: “Come on, this is all a spoof, right?”. Yes, yes it is. We’re fans of yours and have been watching you for a long time Mr. Sumner, and we’ve decided to prank you. The Committee to Prank Scott Sumner.

  33. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. November 2015 at 06:59

    ‘…the problem with contractions is that nobody has cash flow, and, if anything, expectations are wounded.’

    Bhagat and Obreja have actually measured that;


    ‘Overall, our findings seem to suggest that firms react swiftly in response to positive innovations in cash flow uncertainty. Firms reduce tangibles investment, intangibles investment, and employ less labor in order to counteract an increase in cash flow uncertainty.’


    ‘If firms perceive future cash flows as risky they will postpone investment and post-recession corporate investment will take longer to rebound. …cash flow uncertainty during the post-recession period 2008-2009 has declined very slowly, and consequently corporate investment including corporate employment increases very modestly.’

    As far as I can tell, they made little impression with their paper.

  34. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. November 2015 at 07:06

    ‘Patrick, Nader should really stay away from monetary policy.’

    He should avoid all issues even tinged with economics.


    ‘Chairwoman Yellen, I think you should sit down with your Nobel Prize winning husband, economist George Akerlof, who is known to be consumer-sensitive. Together, figure out what to do for tens of millions of Americans who, with more interest income, could stimulate the economy by spending toward the necessities of life.’

    Stand by your man, Jan.

  35. Gravatar of Matt McOsker Matt McOsker
    24. November 2015 at 07:59

    Scott need clarification on this statement:

    ” I pointed out that, at a minimum, they’d first have to lower interest on reserves (IOR) so far that excess reserves fell close to zero”

    I assume you mean negative rates as a mechanism to drain reserves from the system? Wouldn’t that have to be a pretty big negative number at current reserves level – like 5 or 10%.

  36. Gravatar of Kevin Erdmann Kevin Erdmann
    24. November 2015 at 08:02

    Interesting, Patrick. If a firm is on the margin of profitability, then all their cash flow projections for future projects will have a discontinuity where the cost of failures will be taken 100% while the gains from successes will only return 65% after taxes. Very quickly looking at the paper, I didn’t see them address this issue. I wonder if they are attributing some of the uncertainty from policy changes that happened during the crisis to automatic cyclical issues like this.

  37. Gravatar of Brian Donohue Brian Donohue
    24. November 2015 at 10:37

    Great post, Scott.

    It’s 2015, and the deficit is still running north of $400 billion per year. When have we not been ‘doing’ fiscal policy?

    Very good comments from Kevin and Patrick, as usual.

  38. Gravatar of TravisV TravisV
    24. November 2015 at 11:30

    5-year breakeven inflation has been looking good the past few days…..

  39. Gravatar of ssumner ssumner
    24. November 2015 at 19:21

    Matt, I think negative 2% would be more than enough.

  40. Gravatar of TravisV TravisV
    25. November 2015 at 08:23

    William Poole: “The real villain behind low interest rates is President Obama.”


    Gee, then why are interest rates low throughout the planet…..

  41. Gravatar of TravisV TravisV
    25. November 2015 at 08:25

    A lot of good graphs in this new Marcus Nunes post:


  42. Gravatar of TravisV TravisV
    25. November 2015 at 10:47

    “A key inflation metric is now headed in the wrong direction”


  43. Gravatar of ssumner ssumner
    26. November 2015 at 08:43

    Thanks Travis.

  44. Gravatar of Min Min
    28. November 2015 at 14:29

    “Conservatives want lower MTRs and liberals want more infrastructure or social programs. But that’s sort of cheating, as those would presumably be done even if there were no need for fiscal stimulus.”

    You must not live in the United States. Infrastructure in the past decades has gone to hell, whatever presumptions one might make.

  45. Gravatar of Min Min
    28. November 2015 at 14:32

    Besides which, when have conservatives not wanted to conserve and maintain what we have? Infrastructure is not a liberal or conservative issue, per se.

  46. Gravatar of Ray Lopez Ray Lopez
    29. November 2015 at 08:16

    @TravisV who says: “William Poole: “The real villain behind low interest rates is President Obama.” Gee, then why are interest rates low throughout the planet…..” – why indeed? Two scenarios: the Fed is so powerful they influence rates worldwide (laughable), or, money is neutral, and central banks have little influence over any variable, be it nominal or real. Take your pick…I know how our host would vote (lol).

  47. Gravatar of ssumner ssumner
    1. December 2015 at 07:04

    Min, Not sure how your comment relates to anything I said.

  48. Gravatar of Min Min
    2. December 2015 at 08:09


    You claimed that liberals want the gov’t to spend on infrastructure. The evidence is that for a long time in the U. S., neither liberal nor conservative politicians have wanted to spend on infrastructure. That’s why it has gone to hell.

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